Another Tech Selloff

MACRO FRAME

September’s CPI and PPI data continue to fuel expectations of a new hiking cycle from the Fed, while higher interest rates are adding to stress in credit markets.

STOCK INDEX FUTURES

Equity index futures are sharply lower as tech earnings fail to dispel concerns about the cost and eventual returns on AI investment. The focus has fundamentally shifted from spending growth to returns. Tesla fell after reducing its annual capital-expenditure forecast, raising questions about the pace of its AI and robotics ambitions. Meta’s introduction of non-voting shares to help finance its expansion renewed scrutiny of the capital required to remain competitive. Lam Research’s disappointing outlook added pressure to semiconductors, with weakness extending across memory, equipment and other AI-linked names. Bloomberg also reported hedge-fund unwinding of AI positions. The selloff is broader than a single earnings disappointment. SpaceX and Super Micro retreated despite helping lift the market in the previous session, while IBM declined even after beating expectations and raising its software-revenue outlook. The reaction suggests investors are demanding more than headline earnings strength to sustain valuations. Higher oil is reinforcing the pressure. Renewed Houthi attacks and threats to Saudi infrastructure have pushed Brent toward a five-month high, complicating the outlook for inflation, consumer purchasing power and corporate margins.

CURRENCIES

US DOLLAR: The USD index is little changed at 101.78. Today’s equity market dynamics could see the dollar come under pressure. Investors have sought the safety of US Treasuries amid the volatility in AI stocks recently, suggesting that equity sentiment and perceptions on the growth outlook for the AI space have an important bearing on the dollar. However, supporting the dollar is geopolitical uncertainty as multiple news outlets have reports strike activity near the Strait of Hormuz. Money markets currently assign a 11% probability of a hike this month and remained fully priced in for a hike by year-end.

EURO: The euro fell 0.25% to $1.1203. The euro remains vulnerable to France’s fiscal difficulties. French 10-year yields traded near their highest levels since 2002. Unrest and resistance to public-service cuts underscore the political difficulty of reducing deficits, raising concerns about other heavily indebted euro-area sovereigns. Moody’s upcoming sovereign-rating review represents an additional sentiment risk. Its French rating is currently two notches above those of S&P and Fitch. This also leaves the lower house’s budget vote to remain in the spotlight. As for the ECB, money markets continue to expect no policy action this month, while pricing an 73% chance of a hike in December. The market is also priced for 69 bps of tightening over the next 12 months.

Watch point: French sovereign stress will continue to be a dominant factor in price direction, however, the $1.10 level acts as a strong resistance level.

BRITISH POUND: Sterling fell 0.18% against the dollar to $1.3373. Sterling is holding up better against the euro, supported by stronger UK inflation and expectations of a November BoE hike. Headline CPI inflation rose to 3.5% from 3.1% in August, above the 3.4% Reuters consensus. Services and core inflation also exceeded expectations, strengthening the case for further tightening following Tuesday’s firmer wage and labor-market figures. Tuesday’s data also showed that annual weekly earnings growth excluding bonuses rose to 3.7%, versus an upwardly revised 3.6% in the three months through July, while unemployment fell to 4.7%. Taken together, the figures suggest labor market conditions alone may not be enough to bring inflation under control. However, while the reports make the case for a November move the reality of an aggressive sequence thereafter appears unlikely.

JAPANESE YEN: The yen rose 0.66% to 157.07 yen per dollar as traders looked for safe havens amid the steep losses in the equities. With US Treasury yields dropping, the dollar is finding less demand, seeing trade flows into the Yen and Swiss Franc. Today’s yen strength should not be characterized simply as a more hawkish BOJ trade. Rate hike expectations remain centered on unchanged policy at 1.25% next week, followed by gradual increases toward approximately 2% by the end of 2027. Japan’s September CPI release tonight will provide the next test of that outlook, but haven demand is the clearer immediate explanation for the currency’s advance.

AUSTRALIAN DOLLAR: The Aussie fell 0.27% to $0.7010. Reserve Bank of Australia Deputy Governor Hauser overnight said that the effects of tighter monetary policy were becoming evident, though the inflation outlook was “materially worse,” thanks to high oil prices. Following his comments, money markets increased expectations of a November hike from 30% to 57%. However, these expectations could be overdone, especially following recent labor data, which showed a drop in employment, which could give the RBA some confidence that policy settings are adequately restrictive.

Watch point: August’s hiring figures argue for a higher-for-longer stance, leading the focus to Q3’s inflation data.

TREASURY FUTURES

Yields moved lower across the curve as traders sought bond safety. The rally does not mean inflation concerns have disappeared. Brent’s advance toward $112 creates a tension between immediate demand for safety and the risk that sustained energy strength keeps inflation elevated. For now, defensive flows are dominating nominal yields. Today’s $26 billion five-year TIPS auction at noon CT will test demand for inflation protection against that backdrop. Friday’s flash PMIs and final Michigan sentiment report are the next major scheduled indicators before the October 27–28 FOMC meeting. The key question is whether weaker risk appetite and higher market borrowing costs provide enough restraint for policymakers to remain patient in December, even as the oil shock preserves the case for further tightening. The prevailing policy view remains an October pause followed by a December hike. In Reuters’ October 16–20 survey, 94 of 100 economists expected unchanged rates at next week’s meeting, while all 100 expected an increase in December.

Treasuries have found defensive appeal as investors reassess the debt surrounding the AI buildout, the main signal being the rally in Treasuries despite the hot CPI and PPI prints last week and the Fed’s October Beige Book revealing intensifying input-price pressure, including higher oil and diesel costs moving through freight and supply chains. While the hawkish Fed has led the curve to flatten amid contained inflation expectations, we continue to see upside risk to long-term borrowing costs if growth remains resilient.

Watch point: Inflation risk, fiscal and corporate supply, capital competition and term premium will be key factors in determining whether the yield curve maintains its recent flattening or falls into a bear steeping move.

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